Is Government Spending on Broadband a Waste?

The Commission must not only identify the most cost-effective approach for catalyzing broadband deployment but also ensure that any public funds spent are used in an economically efficient manner. A national broadband plan, therefore, must consider the possibility thatspending any taxpayer dollars whatsoever on broadband deployment might be contrary to the public interest.– CEI, in comments to the FCC

The debate over broadband subsidies has largely focused on whether the US is lagging behind other industrialized nations in the construction of broadband infrastructure. Subsidy opponents have attacked those claims, but the unfortunate implication has been that, if America is behind, something must be done about it. Last week, we penned a rather sarcastic treatment of that view, but today we want to explain more thoroughly why even a credible lag simply does not justify subsidies.

There are many goods, even luxury and high-tech goods, that Americans consume less per capita than our peers. The French drink more wine than we do, even though their per capita GDP is lower. The Japanese have more fax machines, despite the same disadvantage. Of course, none of that indicates any problem with the American economy. Rather, the French and the Japanese have different preferences in food and communication, preferences which are also reflected in their lower consumption of beer and personal computers. In precisely the same way, Americans might consume less broadband because we simply want other things more.

Proponents of broadband subsidies often point out that if Americans were better educated about the benefits of broadband and the Internet generally, we might demand more of it. This is true, no doubt; but it also holds true of practically any product. That’s the whole idea of advertising: the more we hear about a product, the more likely we are to buy it. Wine has plenty of health and culinary benefits, for example, but the suggestion of promoting wine through policy elicits a natural skepticism. Are we so sure that we’re underconsuming? Even if we are, do we trust the wine industry not to lobby the government and push us to overconsume? Is the potential gain worth the inefficiencies of taxation and subsidy? Practically no one would believe any of that about wine, but when it comes to broadband, we seem to be saying all three.

The essential fallacy in the broadband debate is the conclusion that, because Americans would benefit from more broadband, we should spend public funds on broadband. But that simply doesn’t follow. Broadband costs money, and if we want it to be more widely available then we’ll have to settle for less of something else. To justify accelerating consumption, we need to show not only that more broadband would be a good thing, but that it would be better than anything else we could have spent that money on. That’s exactly what underconsumption means, and it’s extremely difficult to prove.

That’s not to say there are no justifiable policies that would promote broadband in an efficient manner. The Universal Service Fund for instance, which inhibits broadband by subsidizing older technologies, should be reformed or eliminated. Our woefully inefficient command-and-control spectrum allocation system is also holding back wireless broadband and umpteen other technologies. But lavishing subsidies on telecom giants and stepping gingerly around the toes of entrenched interests is worse than doing nothing at all.

Actually, there is one guaranteed way to find out whether America is underconsuming broadband while benefiting consumers at the same time: Give back the money. Instead of spending billions more on infrastructure, tax billions less. If the taxpayers spent the difference on more broadband, then they were underconsuming. If they didn’t, they weren’t.

Suppose someone at the FCC called up a few rural and inner-city families and asked them what they’d buy with their share of all this money. Would the answer be broadband? No one could seriously suggest that OECD rankings predict the outcome of those phonecalls, but we’re about to spend billions of dollars on the tacit assumption that they do.